Q&A; What is a Higher Lending Charge?
Author: Andy Bedford » Publish Date: 19 February 2010
Question; What is a higher lending charge, and how does it affect me as a borrower?
A higher lending charge is a fee lenders may apply to loans over a certain percentage of a property’s value (or loan-to-value).
For example, a lender may impose an extra charge on borrowers who borrow more than 80% of a property’s value, or perhaps more than 85% etc.
Often the fee will be a percentage of the amount of borrowing that exceeds this threshold.
A typical example would be a 5% charge on all lending over 80% of the property value. In this case, if your home was worth £100,000 and you borrowed £90,000, you would pay 5% of the £10,000 over and above the 80% limit, giving a higher lending charge of £500.
It’s important to consider how the fee is calculated, for each lender. It could be based on the whole loan, meaning the fee could be considerably higher than the example above.
Another important consideration is what the lender does with the fee.
Some lenders charge a fee to increase their profit margin on these loans to cover potential losses if they have to sell properties below market value at auction.
If the lender uses the fee to buy insurance, though, often referred to as a ‘Mortgage Indemnity Guarantee’ (which insures the lender against such losses), in the event of you handing back the keys and the property selling at a loss, the insurer would then have the right to pursue you for their losses under the ‘right of subrogation’.
The FSA forced lenders to stop referring to these charges as ‘Mortgage Indemnity Guarantee’ fees because it was worried that this gave the impression that such insurance policies would benefit the borrower, as well as the lender; so be aware that if you pay this fee or have done in the past, it will not protect you from the lender or insurer pursuing you for any outstanding balances should the property have to be sold at undervalue after repossession.